What is Real World Asset Tokenization on Blockchain
This seems to be the buzzword around the blockchain and cryptocurrency realm. Several traditional financial assets companies, such as J.P. Morgan and Fidelity Investments, have started to move into asset-based tokenization. The cryptocurrency market has evolved from Bitcoin to ICOs and TAO ( Tokenized Asset Offering ). The expansion of cryptos into the Security Token is a natural progression since it allows traditional asset management companies and other institutional investors to participate in blockchain-related projects.
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The Asset tokenization can be classified based on
- Real-Estate Tokenization
- Art Tokenization
- Stable Coins
- VC Fund Tokenization
- Illiquid Asset Tokenization
- Mining Repository Tokenization
As expected by the STO enthusiasts, we have seen that commercial real estate is the first to move to tokenization of assets. This is because of the illiquidity attached to the asset. To liquidate the equity state, asset tokenization on the blockchain provides the solutions for companies to raise funds for their projects.
Tokenized assets are liquid, transparent, and SEC-approved. The tokenization of real-world assets creates an environment of trust among the institutional investors who were hesitant about funding the ICOs.
The roots of asset-backed cryptocurrency originate from emerging technologies such as blockchain. From Fintech, Financial Services to Healthcare and Supply chain, the use cases for blockchain are enormous with applications.
The blockchain and smart contracts in security tokens give us the following advantages :
1. More Compliance
Are regulators like the SEC (in the U.S.) or Bafin (in Germany) happy about tokenized securities?
The answer is: Not yet, but soon they will be.
At the moment, regulators from many countries are trying to handle all kinds of crypto projects out there — figuring out how existing law applies to them and what identifies them being security or not.
What seems to be a Wild West authorities currently need to deal with soon will make their lives much more accessible. Tokenized securities will allow regulators to apply more compliance and control rather than less. When we look at regulators today, they are primarily reactive. They spend a lot of time and money identifying organisations that break the rules. Once identified, it takes years and millions for prosecutions and trials.
The tokenization of securities can completely change this status quo, putting regulators back into the driving seat and letting them govern proactively. Since blockchain technology and smart contracts make it possible to write ownership and law directly into a token, the token will be able to execute, regulate and govern itself. For example, a Security Token can be programmed to verify who can buy and sell it and therefore restrict Security Token holders from trading it to any address that has not passed the required verifications, assuring the issuer that authorized investors will only hold their tokens. Another use case includes restrictions on the token transfer. For example, under SEC Reg D, investors are not allowed to sell their ownership stake for at least 12 months after their initial purchase — this can be encoded into the token, preventing it from being traded before that period ends.
In addition to that, the whole audit trail and data from the Security Token creation and compliance processes are uploaded to the transparent and fully auditable blockchain. Therefore, regulators will be able to drastically reduce their compliance costs, saving energy and resources, which might be worth millions taking SEC`s annual budget of $1.6 billion into consideration.
2. Inclusion of New Investors
Due to these regulatory benefits, sooner or later, authorities will understand the advantages of global Security Token standards and support its implementation. This will provide enormous opportunities for issuers to access an international pool of capital and reach out to a more extensive potential investor base.
Once Security Tokens are tradable globally. Theoretically they will be accessible by anyone with an internet connection (within regulatory limits) and therefore democratize access to capital markets for companies and investors alike.
The regulatory framework that governs Security Tokens will be another good reason for the crypto community to invest without worrying about being scammed (as happened to many putting their money into ICOs). When buying Security Tokens, they “just” have to be concerned with the company's economic success.
The fractionalization of more considerable assets will be another door opener for new investors in a formerly exclusive market. The tokenization of support makes it possible to own just a tiny fraction of a stock, real estate, or piece of art. Previously, these were just accessible to those investors which much capital and the ability to take on longer-term investments.
3. Liquidity
With Security Tokens enabling fractional ownership and lowering minimum investments, more liquidity will come into the market. As more people will be able to purchase smaller stakes, many assets considered illiquid, or not easily to (re)sell can increase their liquidity on the blockchain. For example, if an owner of an expensive piece of property or a rare piece of art wants to turn it into cash, it will be much more likely to find investors who want to lay claim to just a fraction of it rather than the entire asset.
One of the first known prominent examples of tokenizing art is the Mayfair Gallery, putting their entire collection on the blockchain, including a work of art by Andy Warhol, the “14 Small Electric Chairs”, valued at more than $5 million. Also, within the Real Estate industry, many blockchain technology development companies are trying to use blockchain technology to extend their customer base, working on the tokenization of property. Brickblock, Realecoin, Propertycoin, Leaseumpartners, and Slice are some of the pioneers out there.
That the Security Token world does not know weekends or opening times is another advantage over the traditional financial system — allowing all participants 24/7 global access to the Security Token market, which will provide even more liquidity.
4. Efficiency & Scalability
Blockchain technology and smart contracts can potentially replace many of the current inefficiencies in the financial industry. Here is a list that shows you some of the benefits the tokenization of securities will bring:
reducing costs by removing vast parts of the back office banks still need
simplifying accounting and auditing processes
automating KYC and AML process (no back office needed to vet every single investor)
reducing complexity and paperwork with managing securities (e.g., collecting signatures, wiring of funds, mailing distribution checks, etc.)
lowering issuance fees by removing the middleman (banks) from investment transactions
decreasing the reliance on lawyers (in the long run) due to the use of smart contracts
enabling real-time settlements between buyer and seller on the secondary market, therefore less settlement risk
using smart contracts to automate the service provider function through software
automating dividend payments
proxy voting
more accurate and fair asset valuations due to the exposure to a free and more competitive market
5. Transparency
Blockchain allows a uniform method of verifying and tracking data and prevents tampering due to immutability. With these characteristics in place, it becomes the perfect infrastructure to document ownership of securities in a fully transparent way. This will make reporting and auditing much easier, which will help to prevent fraud, mispricing, arbitrage, manipulation by financial institutions, and corruption.
The global economy, especially the financial markets, is transforming seamlessly into the blockchain era. Security Token Offering enhances traditional markets' efficiency and transparency by integrating with the existing financial landscape, allowing institutional investors, fund managers, and accredited investors to participate in tokenized securities offerings.
Rather than working around the framework of regulations and inviting trouble to the project, STOs would work with the regulatory authorities. However, these regulations will be coded into the smart contract, eliminating the need for transfer agents by automating the process.
To ensure this transition of traditional markets into the blockchain, RisingMax a Enterprise Blockchain App Development Company helps companies tokenize assets. Also, we can help industries to create their asset tokenization platforms.
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